Debt markets lap up bond deal

Debt market experts said the sale of Australia’s first nominal 20-year government bond on Tuesday reaffirms that offshore investors, hungry for high-yielding quality assets, are willing to help fund the country’s growing budget deficit.

On its first day of trading on Wednesday, the 20-year Treasury bond, which launched with a yield of 4.86 per cent, was trading around 4.9 per cent. The bond price dipped in response to falls in global bonds, following investor nervousness about the Federal Reserve’s plans to scale back its economic stimulus. (Bond prices and yields move in opposite directions.)

Australian and New Zealand Banking Group interest rate strategist
Zoë McHugh
said the extent of the demand for the 20-year bond gives the government the option of being “flexible in terms of extending the length of its debt to diversify the way in which it funds the budget deficit, if needs be", subject to market conditions.

Of the $5.9 billion 2033 government bonds that were snapped up by investors on Tuesday, 59.1 per cent of the buyers were from overseas and the rest from Australia, according to data from the Australian Office of Financial Management (AOFM), which issues bonds on behalf of the government.

AFR
AFR

Fund managers – understood to include the world’s top fixed income managers
Pimco
and
BlackRock
– accounted for 35.2 per cent of the deal, while central banks bought 27.7 per cent, hedge funds 9.7 per cent and insurers 4.3 per cent.

The oversubscribed syndication, lead by UBS, Citi and ANZ, comes amid debate over the federal government’s proposal to raise the debt ceiling to half a trillion dollars, and as bond issuance for the year is slated to hit a record $70 billion to help the government return to surplus.

QIC head of fixed income
Susan Buckley
said the government’s forecast of a surplus looks increasingly unlikely, making it necessary that the debt ceiling be raised and further bond issuance continue.

“The consensus is for a $42 billion deficit this year; I guess that is why there needs to be some buffer in borrowing limits," she said, adding that while we have a “deteriorating environment, the government will however arrest the deterioration at some point; Australia’s debt fundamentals are still quite significantly better than the United states and many other countries so we are not at critical juncture where the triple-A credit rating is under threat".

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Aside from the attractive yield, Australian debt is highly prized because of its triple-A credit rating, higher currency exposure, stable government, and low debt relative to gross domestic product compared to other triple-A-rated nations.

“The 2033 new issue was an important step in achieving a further lengthening of the exposure that global investors are willing to take to Australia and the Australian dollar," said UBS head of fixed income syndicate
Tim Galt
. “But, it’s an important step for the evolution of the Australian dollar capital markets. Twenty years is a significant duration and securing a A$5.9 billion transaction with a heavily oversubscribed order book in that tenor is a fantastic outcome."

He added that despite a higher Australian dollar trading range, the 2033 new issue attracted significant domestic and offshore interest and secured a great result for the Australian taxpayer by taking advantage of convexity in pricing “as you extend longer on the curve". “This transaction certainly adds to what is already a very strong foundation for the Commonwealth in looking to achieve this, and future years’ borrowing tasks," Mr Galt said.

Also helping to drive demand is the style of bond sale as many investors could not participate in the syndication, and will have to wait until the AOFM tenders the bonds in April next year.

Dr McHugh added that this should also ensure that the bonds perform well.

Investors from Britain and Europe bought 30.5 per cent; buyers from Asia, including Japan, accounted for 27.8 per cent. Offshore buyers account for about 70 per cent of Australian government bond ownership.